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Posted: 10 February 2012 - 1 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]
Category: Research


The recent interim result for 2012 from BHPBilliton has been followed by some shareprice weakness - so is the omniscient market getting it right? And if so, is it the recent buyers or the sellers who will undergo the most remorse. They can’t both be wrong (or right).
It’s a huge group, and I can’t claim to know its guts in detail.
It has had a sweet patch in iron, and a sour patch at one copper operation (Escondida), but it seems to be maintaining a curiously healthy profitability (see chart below)  from its group asset mix. And its huge exposure in iron doesn’t distress me, since it sits well below the world median in cost structure for iron, and also offers a cost edge in metallurgical coal, and will in copper too when Escondida gets back on song.
The graph is a little deceptive in omitting negative margins from single divisions in 2002, 9 and 12, but the Group's orange line does fine – averaging over 30. Lets ignore the upwards trend, and use the average.
And as for topline, since 2001 the group has grown sales/share (which accounts for issuance and buybacks) at 15.8% per year. So what can we do with a growing turnover and a sustained profitability?
I have plugged them into a discounted cashflow (dcf),  sheet as follows:-
As may be seen, the plug-ins for growth of 12%, profit margin (pretax) of 28%, tax rate, and working capital and fixed assets as % of turnover are far from bold. And that spits out almost $40 per share, which translates at spot into over R300 per share. I like a substantial diversified (resilient) asset worth R300 with a rising value trajectory which trades at R250.
And to test the context of my valuation thinking, I plot here price (blue) against a steeper value trajectory (taking the steeper growth from before the current commodity “supercycle”, but discounted at 12.5% ) marked A but also against a flatter more recent one ( trajectory B at 11%).
Owning BHP Billiton at its current price against either imputed value trajectory makes plenty of sense to me. 

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